What types of companies do you look for during your investment screening process?
First of all, we focus on Spain, Italy, Portugal and Greece. The fund is totally unconstrained in terms of market capitalization, but has a small-/mid-cap bias. When it comes to single stocks we clearly focus on companies that have large assets base and a strong exposure to their home markets, because those companies will profit the most from the ongoing recovery story.
But we always make sure that there are good reasons for these companies to be focused on their home market, and not just a lack of competitiveness. This can be for example companies producing goods that are very expensive to export (like concrete or metals). Infrastructure companies are very likely to have large asset bases in their home markets, like telecom or highway networks.
To what extent have South-European companies been able to restore competitiveness over the last 1-3 years?
When analyzing the competitiveness of the peripheral countries, one needs to do that on a country-basis, because there are huge differences. Italy is not yet competitive in terms of unit labor costs, and as mentioned before markets are still waiting for Renzi’s reforms to be taken. Spain is more interesting for investors, as it has really regained competitiveness by reducing unit labor costs by more than 30%. For example, we have seen French companies like Peugeot and Renault investing in Spain due to its cheap labor costs and good infrastructure for car makers. Similar to this, Volkswagen has invested in Portugal, which managed to reduce unit labor costs by around 30% thanks to the reforms driven by the ECB/IWF/EU-Troika. Greece is in a way a different story. Here, unit labor costs have decreased but from very high levels, while industrialization is still quite low. But even in Greece we see good signs that companies gain competitiveness on European markets.
What are the key-differentiating factors of your investment process vs. Peers?
First of all, we do not limit ourselves to Spain and Italy like other asset managers, but have large stakes in Portugal and Greece as well. We are able to do so because we have one even more important differentiation factor, which is our stockpicking-approach. While other funds in this category basically invest in large caps from Southern Europe, we deeply analyze single small- and mid-cap companies that are mostly able to benefit from the recovery in their country. For example, companies with a focus on their home market which manage to reduce their variable costs due to Troika- or government-driven reforms, will profit even from very low macroeconomic country recovery disproportionately. Small recovery in volume causes strong recovery in margins for those companies.
This approach which is based on our proven stockpicking and research expertise makes us more independent from the overall macroeconomic recovery in Southern Europe, which is clearly an advantage towards peers.
